Bloomberg News

RBI’s Subbarao Says India Inflation ‘Way Above’ Threshold Level

July 16, 2012

Duvvuri Subbarao, governor of the Reserve Bank of India, comments on inflation, growth and monetary policy. He was speaking at a book release event in Mumbai today.

The Wholesale-Price Index unexpectedly eased last month to 7.25 percent from a year earlier, a government report showed today. The gauge gained 7.55 percent in May. The central bank will release its interest rate decision on July 31.

On Inflation:

“Certainly, high inflation leads to loss of growth and with WPI inflation at 7.25 percent, the number that came this morning, and CPI inflation in double digits, we are way above the threshold. People have asked us what is the threshold level of inflation? That may be around 5 percent.”

“I’m not implying anything by way of what decision we might take at the policy review at the end of July. I’m only saying that inflation is above the threshold.”

On Growth:

“It is true that inflation is inimical to growth. Low and stable inflation is an essential precondition for securing medium-term growth. Only in a situation of price stability can investors and consumers make informed decisions. So, the RBI’s monetary stance has been aimed at restraining demand and managing inflationary expectations. Our monetary tightening has resulted in some sacrifice of growth in the short term. But that is an inevitable price to pay for price stability. But I must hasten to add, sacrificing growth is only in the short term. In the medium term there is no trade off between growth and inflation.”

“The relationship between growth and inflation is non- linear and there is a threshold level of inflation. Below the threshold, maybe there is a trade off between growth and inflation, but above the threshold there is definitely no trade off between growth and inflation.”

To contact the reporter on this story: Tushar Dhara in New Delhi at tdhara1@bloomberg.net.

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net.


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